Depreciation deductibility in general insurance: write-offs must reflect actual loss and are examinable; majority write-off disallowed.

Whether depreciation write-offs in general insurance are deductible is governed by the Schedule and rule 6 applying rule 3(b); amounts written off or reserved are allowable only to the extent they represent actual depreciation or loss on realisation. The taxing authority may examine and disallow write-offs that are not shown to meet actual loss; the court rejected allowance of four-fifths of the 1953 write-off. The appeal succeeds for the department and the assessee was ordered to pay departmental costs.

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Issues: Whether four-fifths of Rs. 1,21,245 written off in the assessee's books as depreciation for the calendar year 1953 is allowable as a deduction in computing the profits and gains of the business of insurance under section 10(7) and the Schedule to the Income-tax Act.

Analysis: The computation of profits for a business of general insurance is governed by the Schedule to the Income-tax Act and section 10(7) excludes other sections except as the Schedule permits. Rule 6 of the Schedule requires taking the balance of profits disclosed by the annual accounts after excluding expenditure not permitted by section 10. Rule 6 applies rule 3 (b) for dealings with depreciation and losses on realisation of investments and other assets. Rule 3(b) permits amounts written off or reserved in the accounts "to meet depreciation" or loss on realisation, but the proviso limiting interference by the Income-tax Officer applies only to life insurance and is not applicable to general insurance under rule 6. Precedent and interpretation of similar rules establish that amounts written off or reserved must be justified by actual depreciation or loss suffered; notional or arbitrary write-offs are not allowable. Accordingly the taxing authority has jurisdiction to examine the accounts and disallow any portion of depreciation that is not shown to meet actual depreciation.

Conclusion: The question is answered in the negative; four-fifths of the sum written off is not allowable as a deduction and the appeal is against the assessee. The assessee must pay the costs of the department.

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